When Insurers Were the Fire Service - History of Adjusting, Part 4

Did the Cow Kick over the Lantern?

On the wall of my office in Atlanta is a foot-long wooden shield on which are four leaden hands in the form of a firemen’s carry and the date "1752" beneath them. In some office file drawer in Philadelphia is a document I signed many years ago, agreeing never to bring that shield into the Commonwealth of Pennsylvania. On the back of the wooden shield is stamped the words “Policy No.” The shield, with its leaden hands and date, represents an unissued fire insurance policy from the Philadelphia Contributionship for the Insuring of Houses from Loss by Fire.

That insurer was founded by Benjamin Franklin and other Philadelphia notables in 1752 as the first fire insurance company in America. In August of 1967 the first claim I ever settled as a new adjuster in Philadelphia was a dog bite claim under a homeowners’ policy issued by the Philadelphia Contributionship. As far as I know, the firm is still in business. How I came by the shield in the early 1970s while in Miami is another story, but the short version is that my brother was an insurance executive in Pennsylvania at the time.

The Contributionship, in the tradition of managing risk as well as underwriting it, had strict rules for its insureds in addition, of course, to conspicuously displaying the fire mark on the insured premises. According to a history of the Contributionship published in 1952—the 200th anniversary of it—The Gazette notified the mutual insureds that storing gunpowder and heating pitch for the breaming of ships at the nearby wharfs was considered illegal, and would exclude coverage if such was determined as a cause of a fire. Franklin’s Gazette,after all, was the leading newspaper of Philadelphia. In fact, a reward of 15 pounds (£15) was offered to anyone who gave warning of such activities in an insured’s premises, if the owner was convicted of the violation.

The man who knew more about the history of insurance in America than anyone else was Dr. Bernard L. Webb, Professor of Actuarial Science and Insurance at Georgia State University here in Atlanta. While we were both members of the same CPCU Chapter, I got to know him better when we were co-authors of the CPCU 5 text, Insurance Operations, back in 1992. How I wish I had better access to his collection, for he was a true insurance historian. Much of what I learned about the American insurance industry came from Dr. Webb’s “Notes on the Early History of American Insurance” in the June, 1976, issue of the CPCU Annals and from Professors Robert I. Mehr and Emerson Cammack of the College of Commerce & Business, University of Illinois, Urbana-Champaign, in their text, Principles of Insurance (Richard D. Irwin, Inc., 1973.)

Sources such as these are rare in print form any more. If one Googles “Insurance History” some 837 million sites will pop up. Good luck searching that! Even Wikipedia provides little more detail than the previous three parts of this series, but there is a history for most American insurance companies and a few foreign ones as well. Chapter 1 of my Winning by the Rules – Ethics and Success in the Insurance Profession(National Underwriter Co., 2nd Ed. 2008) includes about all I know of the topic, but it does fill a dozen pages of the text and is as good a reference as is likely to be found in print form these days. The point is, without knowing how the insurance industry became what it is in the 21st century, it is difficult to understand our role within it as claim adjusters.

Insurers Were the Fire Service

Early American fire insurers were, like the Contributionship and a similar 18th century operation in Charleston, South Carolina, mutual groups much like a reciprocal exchange, basically insuring each other and operating the fire departments. If one had a fire, the insurer’s fire brigade would respond, but if your “firemark,” like that thing hanging on my wall or something similar for a different insurer, was not seen above your door, the firemen would save a life, but suggest that you might want to insure your next house after it finished burning down.

Today we take the fire service for granted, although we are likely to complain about our tax bills. That is going to be an ever bigger 21st century problem, for big cities like Detroit, for example, can no longer afford their fire departments and the benefits to which the fire and rescue service employees are entitled. For those outside a big city, the problem is even worse—fewer men and women are volunteering to serve in the small rural volunteer fire services any more.

So when that fiery crash occurs on the Interstate out in the middle of nowhere, it may only be one or two old guys driving a forty-year-old LaFrance or Pierce (of the old Pierce Arrow Auto Works days) fire truck who show up; one’s the town’s barber, while the other may be the town’s butcher. It will be hours before mutual aid from other distant towns arrive on the scene to help sort out the mess.

Fields of Coverage

“Individual underwriting was the only form of marine insurance permitted in the (American) colonies," Dr. Webb reports. "A law adopted by Parliament in 1719 prohibited partnerships and corporations, except for two corporations designated by the king, from engaging in the marine insurance business.”

The two corporations so designated, Webb continues, “were the London Assurance Co. and the Royal Exchange Assurance Co.

Although marine insurance was readily available in the major seaports of the colonies by the 1750s, many merchants and planters continued to buy marine insurance from English insurers. George Washington regularly insured his tobacco shipments in England.”

Marine insurance gave rise to the need for marine surveyors, men trained in understanding ships and the hulls, sails, boilers or other equipment, and many of these surveyors, in addition to providing an insurer a report about the condition of a vessel prior to an underwriter insuring it, would also be the average adjuster (the term used for marine claim adjusters) in the event of a loss to a ship or its cargo.

The way the American insurance industry grew was reflected in the names of the various companies in business by the beginning of the 20th century. There were fire insurance companies that sold only property coverages, and casualty companies, which usually indicated liability or accidental death coverages, although liability insurance was not marketed until around 1890, except perhaps to a few businesses. The combination of the two had not yet caught on.

There was also the life insurance industry, often called “friendly societies,” which also led to the health insurance industry. Along with the growing marine insurance industry was the surety business. Each had their own markets, and was jealous of the others. Fire adjusters generally knew little about liability claims, and casualty adjusters knew practically nothing about building damages.

However, there were a few companies that dabbled in other lines, hence there came to be names of insurers such as the St. Paul Fire & Marine Ins. Co., or the Aetna Casualty & Surety Co., or the U.S. Fidelity & Guaranty Co. The Insurance Company of North America, another Philadelphia original, was primarily a marine insurer in its infancy, eventually quickly became a multi-line insurer. Today it is known as CIGNA, selling virtually all lines of coverages.

A fellow named James G. Batterson went to England and was impressed with the travel insurance one could purchase when taking a train or boat trip, so he returned to Connecticut and founded The Travelers, selling travel insurance. In the same town was the Hartford Fire Insurance Company, and over in Boston was a mutual insurer called Liberty. Several life insurance companies began business as a branch of some religious denomination.

The expansion of railroads and other industrial steam requirements gave rise to a need for boiler insurance, and the symbol for the Hartford Steam Boiler Insurance Company remains a locomotive. One factor of boiler insurance was that the boilers had to be inspected before they could be insured or the coverage renewed.

Multi-Line Companies

By the middle of the 20th century the old jealousies between property and casualty insurers was fading and companies started marketing multi-line coverages. The old Basic Auto Policy was among the first to combine both first and third-party insurance in one policy, even adding a little medical insurance. Instead of homeowners having to purchase three policies, one for fire and related coverages on the property, a liability policy in case the dog bit the mailman, and theft insurance for fear of a burglary, insurers began marketing the MIC multi-peril forms under which one could combine dwelling or building coverage with casualty and crime insurance, with perhaps an endorsement for some inland marine insurance on jewelry, furs and art. Today Flo over at Progressive, the gecko at Geico, Sacagawea at Liberty Mutual or Sam at State Farm will sell you all of that, from auto to home to boat to life insurance, all from one good insurance company.

While multi-line adjusters are perhaps less common than they were a few decades ago, adjusters still need to be cross-trained in every type of insurance coverage. Few claims fail to overlap the losses of property with injury, or crime with inland marine. A good multi-line adjuster may handle a cargo claim one day, a yacht sinking the next, a burglary the third, and a multi-vehicle wreck the fourth and study law on the fifth day.

I have cited historical details of American insurance before, such as the story of Dr. Truman J. Martin of Buffalo, the first person to purchase an auto liability policy, from the Travelers in 1898—a coverage so new that the insurer didn’t know what to issue, so they used a Teamsters Liability format.

The idea of workers compensation insurance may have come from Germany in the late 19th century, but under the American system of English common law an employee could sue his employer if injured only if he could prove negligence on the part of the employer—and the employer had all the defenses of contributory negligence or assumption of risk available. A “no fault” system was entirely foreign to the conservative business world of the late 1800s and early 1900s, and most early workers compensation statutes were declared unconstitutional.

The common law system and contributory negligence rules also protected product manufacturers. The principle of caveat emptor held off any need for products liability insurance until 1910, when the concept of liability insurance was only twenty years old. At first it was on an indemnification basis; the insured had to defend himself and pay the claim first, then seek indemnification. An insurer’s duty to defend came later. Early tort claims generally involved railroads. When individuals went up against the politically powerful railroads, courts rarely blinked. Life wasn’t worth much in the 1800s.

The Role of Transportation in American Insurance

As the Industrial Revolution spread from Europe to North America the key to success was transportation. Old muddy Indian trails were insufficient for the commerce that industry created, so the European notion of using rivers and canals struck America in the late 1700s, with the opening of the Delaware & Hudson Canal to bring coal from the mines in eastern Pennsylvania to the Delaware and Hudson rivers. The D&H later became a railroad, and is, today, a part of the Canadian Pacific, one of the big seven North American railroads. Canals soon paralleled the Potomac and crossed from the Susquehanna River to the mountains in Pennsylvania, and over one on cables that hauled the barges up one side and down the other, giving a man named Roebling the idea for steel cables that resulted in his building the Brooklyn Bridge. The Erie Canal ran from the Mohawk River to Black Rock (Buffalo) on Lake Erie, then from Cleveland down to the Ohio River, and Toledo to Cincinnati and Evansville. Canals were everywhere, providing jobs for the thousands of immigrants pouring into the nation from Europe.

But just as the canals were just starting to turn a profit, Robert Stephenson’s steam locomotives arrived. At first they were little more than amusement park rides. But with the Baltimore & Ohio, rail soon became the primary means of moving coal and other commodities across the nation. It wasn’t until the middle of the Civil War that Lincoln signed the bill authorizing the Transcontinental Railroad, but with the Central Pacific building east from Sacramento and the Union Pacific west from Omaha—both cities served by river steamboats—the nation soon had truly national commerce. None of it could have occurred without the insurance industry at the back of the railroads, ready to step in if there was a disaster, investing their millions in the new rail lines that literally fought their way west across the prairies, mountain passes and deserts of the West.

The Role of Adjusters

Along the way were the insurer’s claims representatives, whenever steamboats exploded, trains collided or entire cities burned down. New York, Baltimore, New Orleans, St. Louis, and other major cities all had conflagrations. Was it really Mrs. O’Leary’s cow that started the Chicago Fire? Well, that’s what was told to an insurance adjuster the following morning.

“About 8:30 p.m. 35-year-old Catherine O’Leary, who lived with her husband and children in a cottage on Chicago’s west side [on DeKoven Street], carried a lantern to the small barn back of her cottage to milk her cow,” wrote W. Fred Conway in Firefighting Lore, in 1993. “Setting the lantern on the barn floor, she began her milking when, for reasons unknown, the cow let loose with its right hind foot, which connected with the lantern. The fire which resulted soon engulfed the barn in flames.” Although their description of Mrs. O’Leary differed, all three Chicago newspapers, The Tribune, The TimesandThe Journal, reported that the October 8, 1871, fire did indeed begin in the O’Leary barn. One suggested that it was the second time that evening that Mrs. O’Leary had milked the cow, as a neighbor had requested some extra milk for chowder.

What is, perhaps, even most remarkable for the 19th century, is that of the 2214 acres of Chicago that burned down at a cost of $190.5 million (in 1871 dollars), over $100 million of it was insured. Mehr and Cammack report, “Of these 202 [insurance] companies 68 [paid until they] went bankrupt, 83 paid in part, and 51 paid their claims in full. The result of the fire, besides the usual great spur in the volume of fire insurance written, was a strengthening of state laws regarding the solvency of the fire insurance companies.”

It was only 35 years later that San Francisco was also destroyed by earthquake and fire, as told in the two-part “A Tale of Two Cities – America’s Greatest Disaster?” Claims Magazine, April and May, 2006, with a similar story of insurance adjusting heroism.